Martin Whitman Watch

Guru Martin Whitman’s Third Avenue Value Fund portfolio update lists 37 stocks, three of them new, and a total value of $2.29 billion. The fund’s quarter-over-quarter turnover is 8%. The portfolio is currently weighted by sector with financial services at 26.3%, real estate at 26.3% and technology at 12.4%. Guru Whitman has averaged a return of 5.15% over 12 months, and Third Avenue Management has averaged a return of 7.97% over 12 months.

Martin Whitman, the chairman of the board at Third Avenue Asset Management, made a relatively early release of his fund’s third quarter portfolio this week. While Whitman no longer manages the funds at Third Avenue, he continues to write the shareholder letter each quarter. Third Avenue focuses on valuing its stocks from the bottom up, focusing on the “creditworthiness,” the ability for the “issuer to grow net asset value (NAV)” and the stock’s price in relation to its NAV.

Over the duration of the third quarter the portfolio managers at Third Avenue bought three new stocks bringing the fund’s total to 37 stocks valued at $2.3 billion. Continue Reading »

Martin Whitman is the chairman of the board of Third Avenue Assets Management, a firm with a keen focus on valuing stocks from the bottom up rather than the vicissitudes of the market. In his third quarter letter to his investors, he reveals three vital factors in the Third Avenue stock analysis process:

â€œâ€¦ First the creditworthiness of the company issuing the equity; second, the ability of the issuer to grow net asset value ("NAV") (or its surrogate book value) over the intermediate to longer term; and, three, the price of the common stock relative to NAV.Continue Reading »

Our current investment in Taylor Wimpey (LSE:TW), the U.K. homebuilder, illustrates several additional ways that accounting figures can be misleading. We first bought shares of Taylor Wimpey in April 2011, in the midst of a severe U.K. housing depression. The company had been producing enormous accounting losses, as its land holdings were being written down to values reflective of the economic depression in which the auditors were assessing the values. Meanwhile, the company also found itself selling houses at depressed prices built on land that had been purchased in years prior at much higher costs. On the face of it, the accounting statements were ugly. While Taylor Wimpey was forced to make downward accounting adjustments to its asset base, it owned the same amount of property within its land bank both before and after the write downs.The accounting losses at that time did not, in our minds, reflect the long-term economic reality of the business. As we look at Taylor Wimpey's financial statements today, the stock having nearly tripled from our cost, the company is producing record profit margins.The large profit margins are, in part,enabled by current high house prices in the U.K., but additionally by the fact the Taylor Wimpey's costs are artificially reduced by virtue of its land having been written down during the real estate depression. In our minds, neither during the industry depression nor in recent record-breaking quarters have the company's financial statements been an accurate representation of reality. In both cases, material analytical adjustments are required to reconcile the financial statements to the real world and the truth is probably somewhere between the two extremes.

Fund Management added a second, related holding in CST Common (CST). With nearly two thousand locations throughout the U.S. and Canada (operating primarily under the Corner Store ® banner), CST Brands is the second-largest independent retailer of motor fuels and convenience merchandise in all of North America. CST came onto our radar coincident with its recent spin-off (May 1, 2013) from Valero Energy Corporation, one of the world's largest refining companies. As a result of only recently becoming an independent entity, the company's shares appeared to be temporarily "orphaned," with little sell-side sponsorship, for example, and no readily accessible financial data. CST enjoys a steady, cash-generative business in part because of its relatively broad geographic exposure, with operations spread across nine states in the U.S. (predominantly in the Southwest) and Canada (predominantly Quebec and Ontario). Encouragingly, CST's single largest geographic exposure is the state of Texas (at about a third of CST's store base), giving CST the most exposure to the state's fast-growing economy (based on store count) of all independent convenience store operators. New incentives for management and an ability to allocate capital accordingly will likely help to accelerate corporate growth since former parent Valero appeared to view CST as simply an outlet for motor fuel distribution rather than supporting the potential within its store base.

In addition to growth in the store base,CST also appears particularly well-positioned to improve its margins over the coming years. We see margin improvement coming from multiple sources, including 1) new larger-format stores that are more profitable than legacy stores, 2) increased focus on food merchandise sales which are much more profitable than fuel and cigarette sales and 3) improved technology systems to better manage inventory and costs (currently upgrading its SAP system). In addition to these initiatives, we expect CST management to make acquisitions in an industry that remains fragmented and characterized by smaller, less efficient operators. The Fund's current cost basis equates to an undemanding (in our view) eight percent free cash flow yield. Continue Reading »

Susser Holdings ("Susser") (SUSS) traces its roots back to 1938 when Sam and Minna Susser opened two service stations in Corpus Christi, Texas. Seventy five years later, the company is the second-largest non-refining convenience store operator and motor fuel distributer in the state of Texas and one of the largest company-operated convenience store chains in the U.S. (operating under the Stripes® banner) with operations in Oklahoma, New Mexico and Louisiana as well. We view Susser as a compelling long-term investment opportunity for a host of reasons:

• Growth: Susser has a strong track record of growing organically and via acquisitions under the leadership of CEO Sam L. Susser (grandson of Susser's founder). Continue Reading »

The largest single allocation of capital during the quarter was made to Axiall Common (AXLL). Axiall is a company formed in January of this year with the closing of a merger between publicly-listed Georgia Gulf, a PVC resin and building products company, and the commodity chemical business of PPG Industries, primarily chlor-alkali (chlorine and caustic). PVC resin and PVC building products are economically sensitive and closely linked to construction; however the past few years have seen a partial de-coupling as a surfeit of domestically produced natural gas and derivatives have lowered energy and raw material costs, thus advantaging U.S. chlor-alkali and PVC resin production relative to most global capacity and promoting exports.

Georgia Gulf, Axiall's predecessor, is a company we first investigated in 2007.It was a peer of Westlake Chemical, a portfolio holding that we exited earlier this year as the valuation exceeded our estimates of intrinsic value. From our standpoint, Georgia Gulf was poorly capitalized. Our sister fund, Third Avenue Focused Credit Fund would go on to make a successful investment in Georgia Gulf's distressed debt in late 2009, following the ejection of prior management and a capital restructuring. Were-sharpened our pencils in January of 2012 when Westlake made an equity investment and a hostile bid for the company – the former proving successful while the latter not – but ultimately lacked comfort in an improved, but still unsuitable, balance sheet per our standards for an equity investment. Continue Reading »

The Fund's position in Forest City Common (FCY) was eliminated after its stock price nearly doubled since Third Avenue filed a 13D in October 2011. We were pleased that management delivered on several of the requests we made in our 13D filing, including divesting non-core assets, improving transparency and reducing debt. Given the resultant terrific stock price appreciation, Fund Management elected to sell and re-allocate the proceeds to the new opportunities discussed below. At quarter end, cash accounted for about 12% of the Fund's net assets.

Fund Management also increased its position in Apache Common (APA), which was discussed in last quarter's letter, increasing the Fund's exposure to the oil and gas exploration and production ("E&P") sector to about 10%. The main attraction of our E&P investments (including Apache, Devon Energy, Encana and Total) is common stock pricing at a significant discount to our estimate of NAV with NAV consisting primarily of proved reserves of oil and natural gas. Each company in whose common stock the Fund is invested has a strong management team and a track record for generating attractive long-term NAV growth. Recently NAV growth has been weaker for our companies, and the overall industry, owing primarily to low natural gas and natural gas liquids pricing and slower than expected production growth from new oil plays. The poor overall sector stock performance and resultant divergence between the intrinsic value and market value of the common stocks has attracted the attention of activists who have targeted several companies including Hess Corp., Murphy Oil Corp., Chesapeake Energy Corp. and Occidental Petroleum Corp.The Value Fund sees the same disparity between the intrinsic value of corporate assets and public market prices. Although our companies have not been publicly targeted, the boards and management teams have taken actions to try to improve shareholder value such as selling assets and repurchasing stock (Apache) and pursuing an IPO of midstream assets (Devon).

We further discuss the Fund's recent investments in the energy sector, as well as how sector themes arise from our bottom-up investment approach, in the essay that closes this letter. Continue Reading »

In reviewing our investment in Pargesa, Fund Management noticed that the largest component of its NAV, the common stock of Total S.A. (TOT) ("Total"), was very attractively priced and worthy of a stand-alone investment. Based in France, Total is the fifth largest publicly-traded integrated oil and gas company in the world. The company was incorporated in 1924 and expanded materially through the acquisitions of Petro Fina S.A and Elf Aquitane in 1999 and 2000, respectively. Total has 11.4 billion barrels of proved reserves and annual production of 2.9 million barrels per day (including share of equity affiliates). The company's operations are geographically diverse with reserves distributed as follows: Africa (26% of reserves; 24% of production), Asia (23% of reserves; 20% of production), Americas (19% of reserves; 10% of production), Middle East (17% of reserves; 31% of production) and Europe (15% of reserves and production). Total has significant midstream and downstream operations with interests in 31 pipelines, including eight that it operates and 20 refineries, including nine that it operates.The company is one of the world's leading liquefied natural gas("LNG") players with interests in nine existing plants plus three under construction and an additional four under study. Finally, the company has 14,725 service stations, including 9,100 and 4,500 in Africa and the Middle East,respectively.

Total's management team, led by Chairman and CEO Christophe de Margerie, has an impressive long-term track record: book value per share has compounded at a 15% annual rate over the last ten years (including dividends) during which the company has never lost money.Total has a very strong financial position, and the shares,which offer an attractive 6%dividend (qualified) yield,were purchased at about 7x earnings and a 25% discount to our estimate of net asset value. Continue Reading »

There was an interesting article in the July 22, 2013 issue of Fortune entitled "The Party Could be Over for Stocks." The most interesting part of the article is that it describes precisely what Third Avenue Management does not do when it comes to analyzing equity securities.The Fortune analysis seems irrelevant for Third Avenue shareholders. Continue Reading »

Here’s an update on the current top holdings of Martin Whitman’s Third Avenue Value Fund (TAVFX) at Third Avenue Management. Guru Whitman is the founder, chairman and portfolio manager of the Third Avenue Value Fund where he was CEO until 2003. David Barse is currently CEO of Third Avenue Management.

As of July 1, 2013, Martin Whitman’s Third Avenue Value Fund lists 36 stocks, one of them new, and a total value of $2.33 billion with a quarter-over-quarter turnover of 3%. His fund is heavily weighted in real estate at 30.1% and financial services at 27.9%. Continue Reading »

Value investing is not easily defined. Charlie Munger says that "All intelligent investing is value investing." Bruce Greenwald, in his book "Value Investing," divides value investing into three main schools: the classic Benjamin Graham style, the contemporary style led by Warren Buffett and the mixed style which includes anything in between Graham and Buffett.

My value investing hero is Martin Whitman and I personally see myself as a mixed-style value investor. But if I had to choose between Graham and Buffett, I have no doubts that the classic Benjamin Graham style of value investing would be my choice. Continue Reading »

Checklists are an important tool for value investors. They protect us against our inherent mental shortcuts/biases and a need to “jump to conclusions.” They also make sure that we have thought about a pre-decided set of downsides and are not fitting the data to derive a particular conclusion. This last point is best explained by a story.

A Russian General was driving across a remote village during the World War II when he came across a set of circles on a large wall. At the center of each circle there was a bullet shot. He was mightily impressed and stopped his vehicle to find the shooter. He thought that a good target shooter like this one will be a great addition to his company. He accosted a villager and inquired about the person who was responsible for such a phenomenal shooting. “Oh ! He is the son of the shoemaker. But you don’t understand - he is a weird fellow” - quipped the villager. “Why so ?” - asked the General. Well, he first shoots on the wall and then draws a circle around it.

It is also important that the checklist is brief and to the point. A long-winded checklist resists thorough testing, and many significant details may be ignored at the expense of some minute and significantly less important facts. Hence, I made a very small checklist of things I want to have before I consider buying a company. The list is an amalgamation of several value investors philosophy (Warren Buffett and Martin Whitman among them): Continue Reading »

Dear Fellow Shareholders: The Third Avenue Management ("Third Avenue") mode of operation is to emphasize Fundamental Finance ("FF"), rather that trading strategies. FF encompasses Value Investing, Control Investing, Distress Investing, Credit Analysis and First and Second Stage Venture Capital Investing. Third Avenue is, of course, primarily a Value Investor that is a passive, non-control investor.

FF approaches matters quite differently than do short run traders. In FF in 2012, the emphasis is on credit worthiness, rather than earnings or cash flows. In FF, managements are appraised not only as operators, but also as investors and financiers; as Value Investors, the bulk of Third Avenue efforts are directed toward investing in equities of financially strong companies which, over the long term, have good prospects to grow readily ascertainable Net Asset Values ("NAVs"); and also in FF, it becomes important to understand the motivations and practices of activists. Continue Reading »

Superior Industries International Inc. is founded by Louis L. Borick in 1957 and is headquartered in Van Nuys, Calif. It is engaged in the designing and manufacturing of aluminum road wheels for sale to original equipment manufacturers (OEMs). The company is a supplier of cast aluminum wheels to the automobile and light truck manufacturers, with wheel manufacturing operations in the U.S. and Mexico. The company operates five manufacturing facilities in the U.S. and Mexico. Products made in its North American facilities are delivered to automotive assembly operations in North America, both for domestic and internationally branded customers. Its OEM aluminum road wheels are sold for factory installation, as either optional or standard equipment, on many vehicle models manufactured by Ford, General Motors (GM), Chrysler Group LLC

It is common for investors to read the latest shareholder letters from investment gurus to understand their latest positions and opinions. However, it is often that the real wit and wisdom of the investment gurus are found in old classic shareholder letters. This is one of many in a series of articles where I will extract relevant portions of classic Guru shareholder letters and share with readers my views.

This transaction elevates Third Avenue’s ownership of the company to 9.63 percent, according to a 13D SEC document filed yesterday. Third Avenue previously owned 6.3 percent of the company at more than 23 million shares; it is now at more than 35 million shares after this recent purchase. Continue Reading »

It is common for investors to read the latest shareholder letters from investment gurus to understand their latest positions and opinions. However, it is often that the real wit and wisdom of the investment gurus are found in old classic shareholder letters. This is one of many in a series of articles where I will extract relevant portions of classic Guru shareholder letters and share with readers my views.

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